How Bulgaria fell victim to the tug of war over Ukraine

Under pressure from the West, Bulgaria halted construction of the Russia-backed South Stream gas pipeline – which played a role in the Bulgarian president's decision this weekend to dissolve the government.

Employees stand near a pipe made for the South Stream pipeline at the OMK metal works in Vyksa in the Nizhny Novgorod region of Russia in April. Bulgaria's government has been thrown into crisis in part because of Western efforts to stop the Russia-backed pipeline's construction.

In the EU's poorest country, the government's plans to build part of the South Stream pipeline – a much needed job-creator – have been snared in the East-West geopolitical struggle. And the debate over the pipeline within Bulgaria, in combination with several other crises, played a role in the collapse of Bulgaria's ruling government.

Early last month, Bulgarian Prime Minister Plamen Oresharski announced that he was halting construction of the $45 billion South Stream gas pipeline through the country, under threat of punishment from the EU.

The Russian-backed pipeline – intended to run under the Black Sea and through Bulgaria, Serbia, Hungary, and Austria – would, when completed, supply gas to Europe. Bulgaria could expect billions of dollars in investments and thousands of new jobs from the pipeline, as well as guaranteeing its own energy needs.

But South Stream is also a political football in the fight between Russia and the West over Ukraine. Russia intends the pipeline, one of several linking to Europe, to bypass Ukraine entirely. That would give Russia a greater ability to control gas flow into Europe and to cut off supplies to one customer without impacting others, a tool that could have proven useful in the winter of 2008/09 when Russia halted exports to Ukraine, resulting in disruption for other European customers.

Fearing such leverage, both Washington and Brussels have brought pressure to bear against South Stream.

The EU has raised questions about the legality of how the contracts for the Bulgarian section were awarded, and whether the project violated European regulations. The regulations require different companies to be in control of production, transportation, and the supply of natural gas.

And the US is leaning on Bulgaria over doing business with Stroytransgaz, whose owner is on an American sanctions list issued following Russia's annexation of Crimea.

“We are deeply concerned with Bulgaria’s recent decision to award the contract for the construction of the South Stream pipeline to Stroytransgaz,” wrote Marcie B. Ries, the American ambassador to Bulgaria, in a statement last month. “We advise Bulgarian businesses to avoid working with entities sanctioned by the United States."

“This project had red flags all over it from the start,” says Ruslan Stefanov, director of the Economic Program at the Center for the Study of Democracy in Sofia.

Snowballing

Yet in many ways, this setback was only the start of the problem for the government.

After Mr. Oresharski announced the suspension of the pipeline construction, members of Bulgaria's opposition, as well as government ministers, came out publicly saying that he didn’t have the power to unilaterally block the project. Stung by this opposition, the already weakened prime minister had to reiterate his order.

Even then, Gazprom, the Russian partner, has said that it is continuing work on its part of the pipeline under the belief that the project is in line with regulations.

Last week the Bulgarian government sent a letter to the EU Commission saying it did not believe the pipeline violated any European regulations, but it could take months to clear up the uncertainty. And from next month an interim government will be in charge until new elections are held on Oct. 5.

“This project is pretty much frozen,” says Daniel Smilov, a political analyst with Centre for Liberal Strategies. “Nothing will happen on it until at least after the election, and even then it will rely on positive signals from Brussels.”

Grim times for Bulgaria

The South Stream debate comes at an extraordinarily bad time for Bulgaria's government. It has also had to deal with flooding in the east of the country that left a dozen dead.

To cap it off, two of Bulgaria's leading banks have suffered runs in the last two weeks, after customers received emails and text messages warning them to withdraw their funds before it was too late. On Friday, long lines formed outside banks in the Bulgarian capital and in other cities.

The conjunction of events led Bulgaria’s president, Rosen Plevneliev, to announce Sunday that he would be dissolving his country’s parliament in early August and appointing a caretaker government ahead of new elections.

However, that doesn’t seem to be enough to convince many in Bulgaria. Fresh lines formed at banks on Monday, albeit smaller ones.

“Normal Bulgarians long ago lost trust in all of our politicians,” says one Bulgarian in downtown Sofia who asked not to be named. “History is repeating itself from the crisis in the 1990s [when 14 banks went bankrupt]. Dodgy deals, banks collapsing, high unemployment, and also a feeling that the government is not giving us all of the information."